Fearful that one of euro zone’s members could drop out of the bloc, the European Central Bank is set to keep Greece on a funding drip until the end of the month but a default will leave it little choice but to start turning off life support.
As political negotiations to release euro zone loans for Athens descend into chaos, it has fallen to the ECB to keep Greece afloat, by allowing the country and its lenders run up an ever higher overdraft with the euro zone.
Greece must repay the International Monetary Fund €1.6 billion by the end of June if it is to avoid a default that could push it out of the euro. The mood is darkening not only amongst political leaders but also the 19 euro zone central bank chiefs who, together with the ECB’s executive, have approved €83 billion of back-up funding for Greece’s banks.
Sources familiar with the debate amongst this group told Reuters that central bankers are preparing to pare back this Emergency Liquidity Assistance (ELA) if no political agreement is reached. “As long as discussion are in progress with some hope of a deal it would be crazy for the ECB to withdraw ELA,” said one source.
“If Greece declared default, everything would change. It would be very hard for the ECB to authorize financing with collateral of a debtor in default.” Other people familiar with the matter shared this view. “A cap on ELA (Emergency Liquidity Assistance) and capital controls are only a matter of time,” another source said, pointing to a default as the crunch moment.
The prospect of an end to ECB support raises the stakes for Greece’s prime minister Alexis Tsipras to clinch an agreement with the euro zone for loans in return for economic reforms. Without central bank cash to prop up Greece’s weakling banks, which have seen deposits shrivel, controls on the withdrawal of cash appear unavoidable. Lending would evaporate and euros would become scarce, dealing the already weak economy a mortal blow.
Pressure has long been building for a change of tack at the ECB. Its president Mario Draghi recently acknowledged the debate, saying that he and his peers had been considering the discount on security that Greek banks use to tap funding. If this were to be raised, it would gradually choke off such support.
“We’ll have to see again ... how things are, what is the state of negotiations, what is the state of markets. In other words, how the evolution ... affects the quality of the Greek debt,” Mr Draghi told journalists. For now, the critics are silent, according to a person who attends bi-monthly meetings of the euro zone central bank heads in Frankfurt. They want to give Athens one final chance over roughly another fortnight to strike a deal. Even at that stage some voices would argue for leniency.
“There is no automatic connection between, say, a default of the Greek government and the insolvency of the Greek banks,” ECB vice-president Vitor Constancio told journalists recently, a signal that they may be allowed to continue tapping central-bank funding. Banks that are ‘solvent’ qualify. But this would almost certainly not be possible if Greece were to fail to repay almost 3.5 billion euros of bonds bought by the ECB on July 20th.
Another tranche of ECB-owned bonds of almost 3.2 billion euros falls due on August 20th. “The trigger for a serious review of the emergency fund support for Greece and a review of Greek collateral will happen when Greece misses a debt payment to the ECB,” said one of the officials. For now, many at the ECB are frozen, watching to see what Greece will do. “The feeling is that we have done everything we can and now it’s up to them,” one central bank official said. But patience is wearing thin.
“There is a hardening view in Berlin that if you grant any concessions to Greece, it will discourage others such as Portugal from following the rules,” said Marcel Fratzscher, who heads the Berlin-based DIW economic research institute. “If it were to come to a Grexit, I think that the German government would go probably along with it.”
Reuters
